Biogen Idec Too High Too Fast?

Biogen Idec (BIIB) is now off its 52-week high of $226.18 (reached earlier today) but up from a 52 week low of $126.39 (of June 4, 2012). At $218.84 it has risen 73% off the low.

I began following BIIB in the first quarter of 2006, but did not acquire stock until February 2008, when I picked it up at $61.57 per share. In the short run I overpaid, but I picked up more later that year at $46.97. I person with perfect timing could have picked up shares at $40.27 on November 28, 2008. Biogen then  rose to $67.05 by the end of 2010, and looks like it invented an anti-gravity machine this January.

Biogen did so well that it became too large a percentage of my portfolio (according to my portfolio rules) so I sold half of my position on May 16, 2012 for $137.19. Now of course I wish I had violated my portfolio rules and kept the stock longer, but I had other situations where those same rules kept me out of major trouble (they were the main reason I sold most of my Dendreon stake before the price collapsed).

Even though my remaining Biogen stake is well within my portfolio rules I have to ask: is BIIB overpriced? Should I sell it and look for a better value proposition?

There were reasons Biogen was priced where it was in 2008 through 2010, the big one being a disease called PML (progressive multifocal leukoencephalopathy) caused by the JVC virus. Biogen's specialty is multiple sclerosis MS therapies. Its Avonex was the most prescribed MS therapy, but the new wonder drug was supposed to be Tysabri. MS is an autoimmune disease; MS therapies work by selectively suppressing the immune system. Turned out, the JVC virus lurks in the brains of about 1/2 the population, generally doing no harm except when the immune system collapses, when it causes PML, and often results in death.

Tysabri use led to some PML cases, and in a few instances to death. Not knowing what the rate was, nor what treatment could be given for PML, the FDA revoked Tysabri's marketing license. The immediate solution turned out to be to monitor for PML and stop giving Tysabri if there were symptoms. The FDA re-approved Tysabri provided a monitoring program was in place. While Tysabri was so effective that sales ramped back up substantially, naturally there was concern by doctors, patients, and investors that we might see more PML deaths and a permanent ban on Tysabri.

Nevertheless in Q1 2008 Tysabri sales were $115 million, total Biogen revenue was $942 million, and GAAP EPS was $0.54. It being the recession, investors were risk-adverse, and it seemed no amount of good news on Tysabri, revenue, or profit could do much for the stock until late 2010.

So much of the run up in the price was just investors catching up to the new reality: a highly-profitable biotechnology company with a strong pipeline of potential future blockbusters. But in the same way investors lagged reality before 2011, perhaps so many momentum players have jumped on the BIIB bandwagon that the stock has gotten ahead of its fair valuation.

By the beginning of 2013 we had pre-screening for JVC and better treatments for PML, reducing the risk of PML mortality to statistically close to zero. We have substantial Fampyra revenues, though that therapy had also had its issues.

Plegridy (peginterferon beta-1a) for relapsing MS pivotal Phase III data has met all primary and secondary endpoints after 1 year cutoff of a two-year study. Biogen expects to file with FDA and EMA (Europe) by mid-2013

Daclizumab-HYP Phase III data readout expected in 2014. It is also for relapsing forms of MS.

Biogen also filed for approval with FDA for Hemophilia Factor 8 for A and 9 for B, based on significant Phase III trial results.

A number of other therapies are in Phase I, II, or III trials. See the Biogen-Idec product pipeline for more details.

So we can figure that the most likely scenario is that Biogen Idec will see substantial revenue and profit growth over the next few years and new therapies come to market. It is unlikely that everything in the pipeline will get good results and FDA approval, but Biogen has a lot of shots on goal.

You can build spreadsheets (and I have, and sell-side analysts certainly do) guessing at revenue and profits from future therapies based on patient populations, competing therapies, and guesses about pricing. But experienced pharmacology and biotechnology investors know that promising therapies often fail, and unexpected side effects can show up even after FDA approval. Picking winners of competitive races is also more guesswork than science.

So a good hard look at the latest quarter should keep us anchored in reality, and then some P/E ratio points can be added to reflect optimism about profit growth in the next few years; add as many points as you are comfortable with.

Biogen reported on the first quarter of 2013 last Thursday. Revenue of $1.415 billion was up 9.5% from Q1 2012, which is quite good and means a fair P/E ratio should be above the market average. GAAP EPS was $1.79, up 43% y/y; now that should be worth some a P/E ratio well above market. Ballpark it at 30 to 1.

Guidance is for 2013 GAAP EPS of $6.69 to $6.90. Given that non-GAAP guidance is $7.80 to $7.90, let's use $7.00 and multiply by 30. That gives us $210 per share, not much off today's auction price.

So my ballpark estimation is that even at this price BIIB is still a good value. Included in the price are estimated 2013 profits. The pipeline of new drugs revenue and profits won't kick in substantially until 2014. I would expect BIIB to end 2014 in a higher price band, depending on the details of new product ramps.

I am inclined to hold my BIIB and, if I need to sell stock because I spot another opportunity as good as Biogen was in 2008, I could probably find something else to sell. Most likely I will leave BIIB off the leash until it again becomes a risk management problem from being too large a percentage of my portfolio. If I am wrong and it falls in the short run, or becomes a smaller percentage of my portfolio again because something else runs up, I might even buy more.

Keep diversified!

Disclaimer: I own share of BIIB and reserve the right to sell them or buy more at any time, even though I currently have no plans to change my position.

See also:

My Biogen Idec main analyst conferences page.
My BIIB Q1 2013 conference notes
www.biogenidec.com

NVIDIA Price Counts on Tegra Ramp

(original title: NVIDIA: Counting Chickens Before They Hatch)

As an analyst and investor, one of the main things I do is count chickens before they hatch. Today graphics chip specialist NVIDIA has a high price-to-earnings ratio (non-GAAP 62x trailing, 26x leading), indicating some investors are counting on a lot more chicken profits in the future than they have been seeing lately. Is this a smart assumption?

NVIDIA will have a profit boost for the next six years from its licensing deal with Intel. For the most recent quarter ending January 30, 2011 it booked $57 million for the litigation settlement portion of the deal (booked as a negative operating expense, not revenue). For each quarter it will book about $60 million in royalties.

Other than that, the last couple of years have been hard on NVIDIA. Q4 fiscal 2011 (the most recently reported quarter) revenues were $886.4 million, down 10% from $982.5 million in the year-earlier quarter. That does not sound like a high-growth company that deserves high PEs on its stock price. [for a fuller report on Q4, see NVIDIA Q4 fiscal 2011 analyst conference call summary]

What speculators are speculating on is a chip called Tegra. The first version was interesting but did not generate much revenue. The second version is available now in a few tablet and smart phone devices. It produced little revenue in Q4, but is supposed to contribute substantially to Q1. Therefore, instead of a normally seasonally down Q1, guidance is for a 6% to 8% sequential revenue ramp. That is impressive, if it happens.

In addition, the third version of Tegra, called Kal-El for now, is already sampling and is supposed to be in devices for sale for holiday 2011 shopping. Reviews of Tegra 2 are generally positive.

The NVIDIA vision is not just to dominate the smart phone and tablet markets. Future versions of Tegra are supposed to be powerful enough to go into notebooks, desktops, and ever servers.

Before you pay a premium for all them chickens, you might want to think about all the other chickens that will be on the market. NVIDIA's Tegra CPU unit is based on the ARM architecture, which anyone can license. The NVDA advantage is in graphics, but there are a number of companies that license graphics capabilities that were designed specifically to work with ARM. NVIDIA's were designed to work with the 8086 architecture of Intel and AMD.

Competitors each have some advantages. Apple, of course, is the perceived frontrunner. There is no guarantee that the iPhone is ultimately going to be defeated by Android-based phones or less likely competitors.

When it comes to ARM based chips for tablets and phones, each competitor brings some serious advantages to the court. Qualcomm has far more extensive experience in cell phones than NVIDIA does; so does TI. Intel and AMD want to get into the game. AMD gained a lot of market share against NVIDIA in discrete graphics cards for computers during 2009 and 2010; their fusion chips offer some extreme advantages, especially for tablet computing. Among a host of other contenders, Marvell (MRVL) should be noted, since they generate a lot of cash each quarter and have a lead in China, a much bigger market to fight over than the U.S. market. Then there are the Koreans, and Japanese, and numerous small innovators.
None of the other contenders have PE ratios as high as NVIDIA's. I have owned NVIDIA stock in the past, and if it had a low PE I might scoop up those chickens right now. I have always admired NVIDIA's technological skills, and the Tegra 3 is promissing. I don't see how it can be all that much better than competitors, however. Everyone has promissing designs, everyone is hustling to squeeze usability out of the same limitations of silicon.

I have done well recently with some hatchlings at Dot Hill, Dendreon, and TTM. On the other hand, I like to keep in mind Anesiva, where I correctly predicted its Zingo product would hatch (get FDA approval), only to watch it die a horrible death and then take the entire company into bankruptcy with it. The secret is to see them chickens before momentum investors drive up the stock prices. If you bought NVDA a year ago at $8.65 per share, congratulations. If you are thinking about buying it today at $25.48, you might want to consider that it could take NVIDIA a couple of years of outstanding growth to justify this price.

Seeing the Value in Stocks Today

There are a lot of measuring sticks that can be used to value people, goods, services, and investments. Using the wrong measure, even when that measure is used accurately, can lead to poor or even disastrous decisions. I have read a lot of bad financial advice lately, but most of it would not be bad all the time. The ability to match up general guidelines to specific situations is key to investment success.

A lot of pundits are saying "stocks are overvalued." Even if true, this statement is so general as to border on useless advice to most investors. Even in a bull market, there are individual stocks that are undervalued; even in a bear market, there are individual stocks that are overvalued. If you want to know if stocks, on average, are overvalued, you need to choose your measuring stick. The most commonly used is the price-to-earnings ratio, abreviated P/E or PE. Generally, low PEs are better, as they indicate more earnings you get for each dollar you spend on a stock.

But PEs don't exist in isolation, whether you are looking at market averages or a PE for an individual stock. Two companies can have stocks that are at differing PEs, but both be of equal intrinsic value. For instance, company A might seem like a twin of company B except that A has a healthy cash balance and B is deeply in debt. So even though they both produce the same earnings (aka net income), we would expect A to be more highly valued, and it would have the higher PE. That does not mean company B is bad, it just takes the debt into account when valuing the stock.

Companies C and D might also be twins, if you just look at their accounting numbers for the latest quarter. But company C is a technology innovator and is growing its revenues and profits, while company D is essentially static. So company C should have a higher PE. If it did not, investors who owned D and looked at C would sell D and buy C until an equilibrium is reached.

There are, of course, other variables that affect a company's PE, including subjective factors.

Now think of stocks in general, or in aggregate. It does not make sense to say something like "between 1932 and 2009 the average stock PE was X" but today the average stock PE is X+ something, so stocks are too high.

To value stocks in general, you would need to know how much cash and debt there is on the balance books of the companies we are aggregating. You need to know whether the bundle of companies is growing revenues and profits. You need to know where you are in an economic cycle, which no one seems to be very sure of. You would need to predict the rate of inflation, and compare stocks to alternative investments like real estate, bonds, cash, and CDs.

You also need to look at how the PE itself is created. I like GAAP numbers because they take everything into account, but someone trying to sell you stock almost always uses prettier non-GAAP numbers. The stated PE is usually reasonably objective (once you choose between GAAP and non-GAAP) because it is based on published reports for the last four quarters. But where the company will be in a year is important to investors, and that is guesswork.

What if PEs for the market at a whole are above some historical average, but in six months, if prices remain the same, they will be below the historical average because profits are ramping?

Profits were horrible in Q1 and Q2 2009. Do we measure a company's worth by its profits in those quarters, or by a backward-looking year that includes those quarters? Certainly we should take those quarters into account, but they should not be allowed too much bias.

In this market, where people feel they were lied to in the last bull market (because they were) and are struggling just to keep their homes, only a few stocks are likely to be truly overvalued at any time. From my point of view hundreds, if not thousands, of stocks are so undervalued that I wish I could buy them all. I would buy the whole companies at today's prices, if I were in that league of investor.

Instead I manage my small portfolio as best I can. It includes some speculative stocks of companies that will leap in value if they can ever get to profitability, like Hansen Medical and Dot Hill. But the core of my holdings are in companies like Marvell Technology Group, Gilead, and Biogen. They have large cash balances, are growing, and yet have low PEs. There are hundreds of stocks that have all these attributes right now. And there are good companies paying higher dividends on their stocks than you can get from CDs or Treasury bonds.

Know what you are doing. Do your own research. And ...

Keep Diversified!